The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former attorney general yesterday warned that the Bahamas' 'blacklisting' response "strikes right at the heart" of its decades-long policy to attract foreign direct investment (FDI).

Alfred Sears QC told Tribune Business that the Multinational Entities Financial Reporting Bill effectively "undercuts" the preferential tax regime used to attract major overseas developers and investors by eliminating 'ring fencing'.

Mr Sears said that while this could lead to the creation of a 'level playing field' on tax incentives, something long called for by many Bahamians, it would also force a major reevaluation of how this nation lured FDI.

And he blasted as "an absurdity" the Government's failure to-date to publicly disclose the agreement it made in signing up to the Organisation for Economic Co-Operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) initiative.

The former attorney general said this made it impossible to fully understand and analyse the Multinational Entities Financial Reporting Bill's implications, given that the BEPS agreement was needed to set it in the proper context.

While acknowledging that the European Union (EU) 'blacklisting' was "not the end of the world", Mr Sears said the Bahamas was again being forced by external pressures to "reinvent itself" and enact reforms it should have initiated itself for its own interests.

"Quite frankly, it's only when you go through it that you get a sense of the full magnitude," he told Tribune Business of the Bill. "We're talking now about a major overhaul and under-cutting of what has been the national policy, by and large, for incentives to attract foreign direct investment.

"It goes well beyond the financial sector. The whole national policy, administered from the Prime Minister's Office in these Heads of Agreement, is based on preferences and exemptions. It's not just the financial sector; it goes right to the heart" of how the Bahamas attracts FDI.

The EU 'blacklisted' the Bahamas for allegedly being non-cooperative in the fight against tax avoidance, especially by multinational companies. Of particular concern to the 28-nation bloc was the absence of 'economic substance' requirements, which it views as enabling companies to shift profits/income earned in other countries to Bahamian-domiciled vehicles that either have no physical presence or conduct no business activities here.

The EU believes this could allow multinational enterprises to avoid taxes in other countries, and the second element of its concerns is 'ring fencing' - the existence of a preferential tax regime for foreign investors and non-resident entities compared to that enjoyed by their Bahamian counterparts.

The Multinational Entities Financial Reporting Bill eliminates such 'ring fencing' for International Business Companies (IBCs), Foundations, Executive Entities, Investment Condominiums (ICONs) and Exempted Limited Partnerships.

Yet in so doing, and complying with the EU's demands, Mr Sears yesterday warned that the elimination of 'ring fencing' was removing "the primary basis on which the Bahamas has sought to attract foreign direct investment from Sir Stafford Sands' time".

"In other words, the basic concept of national development in the Bahamas is that FDI is the engine, and the way we attract FDI is through preferences," he told Tribune Business. "The whole idea, when you read the Bill and the relationship it has to the BEPS initiative, is that all of that is considered to be a hostile act and a 'harmful tax practice'.

"It states right in its body that it's not for the peace, order and good governance of the Bahamas; it's for the benefit and interests of the EU. What we do with our investment strategy is a 'ring fencing'. It's a preferential treatment. This really raises a fundamental question of national policy, and we need to have a national conversation.

"The whole concept of preferential treatment of foreign enterprises is now perceived as a strategy to erode the tax bases of EU members."

Mr Sears agreed that eliminating 'ring fencing' ironically "favours Bahamians indirectly" by placing them on a 'level playing field' for tax incentives, but argued that the Bill's proposed changes were so fundamental that this country cannot afford to "stumble into" them without "due deliberation".

He warned that this was impossible without disclosure of the precise terms upon which the Bahamas has agreed to comply with the OECD's BEPS initiative, especially given that the Bill's first half was dedicated to addressing this issue.

The Minnis administration last year said the Bahamas had committed to joining the BEPS 'Inclusive Framework' and implementing its 'minimum standard', which involves complying with four out of 15 criteria.

These are (Action 5): Countering Harmful Tax Practices; (Action 6): Treaty Shopping; (Action 13) Transfer Pricing Documentation and Country-by-Country Reporting; and (Action 14) Dispute Resolution. Yet without the timelines, terms and conditions on which the Bahamas has agreed to implement BEPS, Mr Sears said it was impossible to have a "meaningful conversation" on the way forward for this nation.

"How the hell can we do it if we don't know what has been agreed to in our name," the former attorney general told Tribune Business. "We seem to be complicit in keeping this away from public conversation. Word make a difference.

"How can I make a sensible, informed public intervention and assist the Government? I need to know what's in the agreement. Let us see what it is that we have committed ourselves to. We need to know what was signed on our behalf. How can you sign such a far-reaching thing? This is what I call an absurdity."

Mr Sears said transparency, disclosure and information were essential to a democratic society, adding that "angst and paralysis" would be the inevitable result if the private sector is 'kept in the dark' on BEPS.

"The more fundamental question is how do we reinvent ourselves," he told Tribune Business. "It's not the end of the world. The world is changing. It's the external threats that are going to force us to do what we should have been doing long time."